The auto industry has always reflected the economy that supports it and most auto industry insiders agree that the recent consolidation of new car dealerships was necessary to maintain the equilibrium between supply and demand.  Unfortunately, the sensitive balancing act between new car supply and consumer demand was thrown off by the “success” of the Cash For Clunkers Program which artificially depleted new vehicle inventories.  Auto dealers had already cut back on new car orders to accommodate reduced sales volumes, and floor plan limits capped by shrinking working capital reserves limited the amount of new and used cars that auto dealers could keep in stock.  As a result, car dealers have not been able to timely replenish their sold inventory to maintain sales momentum and preserve profitability.  More urgently, dealers are scrambling for a way to stay ahead of fixed expenses that have already been cut to the bone.

Many automotive advertising agencies predicted that the Cash For Clunkers Program would produce an artificial wave of business with the associated “peak” in new vehicle sales during August followed by the “valley” in September that could continue through the balance of 2009.  Recent SAAR statistics project an adjusted annual sales rate of 8.8 million new vehicles in September proving that their worst fears have been realized.  Successful auto dealers focus on solutions rather than problems.  As a result, used cars have taken on a new importance with a number of creative techniques being applied to acquire used cars with a priority of selling used cars vs. new cars that are in short supply.

To make matters worse, reduced new car sales have directly impacted used car sales and related profits since as many as 60 percent of new car sales have a trade-in.  These lost trades have reduced the number of used cars available for sale.  That frustrating law of supply and demand has raised the profit per unit on used cars from $161 to $214 per unit from January through July 2009 with additional increases expected as inventories are further reduced.  In addition, used car sales are projected to increase from previous annual levels of 36.5 million units to 39 million vehicles which should increase the per unit profits even further.   

Old world best practices often survive in today’s Internet based auto industry and several proven techniques to acquire pre-owned vehicles have been enhanced by new technologies being applied by forward thinking auto dealers who are already working on the problem.  For example, conventional wisdom when appraising a trade-in suggests that “the book doesn’t buy the car.”  Of course that statement was previously used by an auto dealer to justify a wholesale offer vs. a retail request by a customer negotiating to buy a new car or even a later model used car.  Today that logic is more often applied by auto dealers to justify paying more than book value to get the trade-in when selling a new car.  Of course the auto dealer’s profit must be considered when he is buying cars as well as when he is selling cars and the shrinking profit margins of today’s challenging economy leaves little room for error. 

The solution to stepping up for the trade lies in the use of new inventory management software that allows an auto dealer to instantly access both his own historical data and real time Internet price information on similar vehicles to more accurately determine the wholesale value at the time of the appraisal.  Applications provided by vendors like FirstLook, vAuto, eCarList and AAX - to name a few - can compare and compute this information instantly with integrated access to the auto dealer’s DMS, CRM and desking tools allowing the dealer to intelligently evaluate the most that he should invest in the trade based on past and present relevant sales. 

Additional support by these applications extend into their integrated marketing platforms to instantly post the trade-in to the auto dealer’s inventory so it can be posted on dealer websites as well as any third party inventory sites that they link with, such as http://EveryCarListed.Com .  Simply put, the sooner the vehicle is offered for sale the sooner the dealer can turn a profit and after all, time is money!  Applications like FirstLook automate the process even further with their “Consumer Optimization” process that relies on proven algorithms to draft the copy for the online advertisements for trade-ins based on features and benefits that have proven conversion rates with “calls to action” built into the copy to cut through the clutter of other online ads.

Another old school practice that has survived as a source for used cars for auto dealers is to resource the “For Sale By Owner” ads placed in the newspaper and specialized magazines.  People advertising to sell their vehicle are often also buying a car so they are an excellent prospect for a sale, however,  a well crafted offer to buy their vehicle even of they do not want to buy yours is a proven technique that has a renewed priority.  Selling a car is still job one, but CarMax has proven the value in using the opportunity to acquire used cars for sale as well. 

The advantages offered by today’s Internet vs. old world media is best demonstrated by Every Car Listed which has replaced the newspaper and local auto magazine as a convenient “one stop site” to find people looking to sell their vehicle in their dedicated For Sale By Owner section.  The education that these private sellers get as to the value of their vehicle by comparing it to similar vehicles for sale by the auto dealers that post their inventories on EveryCarListed makes arriving at a fair market value even easier.

The value of selling used cars vs. new cars in today’s market isn’t limited to front end profits.  The opportunity to sell extended warranties on used cars vs. the long term factory warranties included on new vehicles, the increased margins earned on customer pay service on used cars after the sale vs. warranty work on new cars and the ability to provide products beyond the limitations of your new car franchise are all valid reasons to sell used cars - if you can get them!

Increasing the trade-in ratio at your dealership with improved appraisal processes is job one when it comes to shifting focus from new car sales to used car sales.  Combine those efforts with creative techniques to purchase used cars from customers in addition to participating in the wholesale auctions - especially the new online auctions that bring the vehicles to you - and you are on track to ride out the slowdown in new vehicle sales. 

New car franchises are still an important platform to stay competitive and profitable in the auto industry.  In addition to the recognition and branding in the marketplace for the new vehicle buyers, the access to factory supported floor plan and retail financing sources, factory subsidized pricing and Tier I and Tier II advertising support there is also value in the ability to sell Certified Pre-Owned Cars as an alternate to new cars.  Certified used cars are a proven commodity and selling Certified Cars is limited to new car dealers representing their own product line.  With that said, as much as I value new cars - in today’s market - Used Cars Rule!

This entry was posted on Tuesday, September 22nd, 2009 at 2:00 pm and is filed under Hot Topics. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.